Goldman Sachs – Saudi Stocks Turn Pricier Against EM Peers After OPEC+ Boost
Saudi Arabia’s stocks are getting more expensive relative to their peers, buoyed by the recent oil-price rally.
Stocks in the kingdom have surged 7.6% this year, extending gains with oil after the Feb. 4 decision. That’s pushed the Tadawul index to 19 times its estimated earnings, about 27% higher than the MSCI EM Index.
While the gains are a sign of growing confidence that Saudi Arabia’s oil-dependent economy may be on the mend after crude prices slumped last year, a more sustained rally may start to drive investors to seek alternatives. Stocks in Russia, another energy-reliant economy, may prove more attractive because they have the added benefit of possible currency appreciation, according to Hasnain Malik, the head of research at Tellimer in Dubai.
Higher oil prices are key for Saudi revenues at a time when the pandemic has slowed down economic activity. Analysts from Goldman Sachs Group Inc. to JPMorgan Chase & Co. raised their estimates for Brent crude for the medium-term following the OPEC+ meeting, with the former seeing prices at $80 a barrel by the end of the third quarter. Brent ended at $69.36 a barrel last week.
As prospects for companies listed in Riyadh improve and the shares rise, their valuations will become even more disconnected from peers in the region and other emerging markets, Malik said in an interview with Bloomberg TV. Saudi shares are trading at about a 20% premium to their five-year historical average on the basis of their book value, compared with a roughly 15% discount for the United Arab Emirates, he said.
Looking at bigger comparable markets, Malik said that although Russian stocks also trade at a similar premium to historical levels, they may benefit from potential upside to currency, with the ruble “seen as between 10-15% too cheap.”
Since there is no expectation that Saudi Arabia will change the pegged regime for its riyal any time soon, “you don’t have that second kicker for those who want to play those higher oil prices in big, liquid equity markets,” Malik said.
— With assistance by Manus Cranny, and Yousef Gamal El-Din